Goldman Sachs, Bank of America Say Fed to Hold Rate

Goldman Sachs Group Inc. and Bank of
America Corp. say a weaker-than-forecast June jobs gain in the
U.S. will lead the Federal Reserve to keep its benchmark
interest rate at almost zero until the middle of 2015.

The Fed, which has pledged to hold the rate low through at
least late 2014, will amend its so-called forward guidance
before deciding on a new round of bond purchases, according to
the companies. Goldman Sachs and Bank of America are two of the
21 primary dealers that trade directly with the central bank.

“The ‘late 2014’ formulation has now ‘aged’ by six months
since it was first adopted, but the economy still looks no
better,” Jan Hatzius, the chief economist at Goldman Sachs in
New York, wrote in a report yesterday. The central bank may
announce the change as soon as its next policy meeting July 31
to Aug. 1, Hatzius wrote.

Chairman Ben S. Bernanke faces jobs growth that slowed in
the second quarter to one-third the pace of the prior three
months. The gain in June was 80,000, the Labor Department
reported July 6, versus 100,000 projected by a Bloomberg News
survey of economists. Bernanke hasn’t ruled out more bond
purchases, and he said June 20 that more easing probably will be
needed unless there is “sustained improvement in the labor
market.”

The Fed bought $2.3 trillion of securities in two rounds of
so-called quantitative easing, known as QE1 and QE2, from 2008
to 2011 to support the economy. It then embarked on a plan to
replace $400 billion of short-maturity Treasuries in its
portfolio with longer-term debt to cap long-term borrowing
costs. It expanded the effort, known as Operation Twist, on June
20 by $267 billion and extended it until year-end.

Asset Purchases

The policy setting Federal Open Market Committee will
probably implement a new round of asset purchases when Operation
Twist ends, according to Hatzius.

Data on retail sales, industrial production and orders for
durable goods will determine when the Fed acts, Michelle Meyer
and Joshua Dennerlein, economists at Bank of America in New
York, wrote in their report July 6.

“In our view, the next step is to push out the forward
guidance from late-2014 to mid-2015, followed by further asset
purchases of $500 billion,” the economists said. Retail sales
are likely to disappoint, according to the report. “We expect
manufacturing production and durable goods orders to be soft.”

Benchmark 10-year Treasury yields fell five basis points,
or 0.05 percentage point, after the employment report July 6,
approaching the record low.

The yield was little changed at 1.54 percent as of 12:25
p.m. in Tokyo, according to Bloomberg Bond Trader data. The
price of the 1.75 percent security due in May 2022 was 101
29/32. The all-time low yield was 1.44 percent set June 1.

December Announcement

Ward McCarthy, chief financial economist at Jefferies Co.
in New York, predicts the Fed will announce QE3 at its December
meeting, unless the sovereign-debt crisis in Europe or political
wrangling over the budget deficit in the U.S. curtails growth
and prompts action sooner. Jefferies is another primary dealer.

“They’re not even forecasting sustained improvement in the
labor market, so my interpretation of that is that they expect
to do more,” McCarthy said. “There’s no reason to do it now
that they’ve already put something else in place.”

To contact the reporter on this story:
Wes Goodman in Singapore at
wgoodman@bloomberg.net

To contact the editor responsible for this story:
Rocky Swift at rswift5@bloomberg.net